Economic Times: July, 2016
Mumbai: Brookfield, the world's 2nd biggest manager of alternative assets like real estate and private equity from Canada, is closing in to make its second big buyout in the Indian toll roads and highways sector.
Brookfield has emerged as the frontrunner to take over the entire portfolio of 11 road projects of Anil Ambani flagship Reliance Infrastructure for an enterprise value of Rs 8000 crore, said multiple sources aware of the ongoing negotiations. Both sides have entered into exclusive negotiations and are hoping to sign a definitive sale agreement by next month.
Last August, Brookfield agreed to buy six road projects of Gammon Infrastructure for an enterprise value of Rs 2000 crore. It is today the sole foreign player to own 100 per cent of road assets portfolio in India.
Reliance is among the largest NHAI concessionaire with concession periods ranging from 18-30 years. All its 11 roads - located in high traffic urban corridors including New Delhi, Bangalore, Jaipur, Agra, Gurgaon, Pune among others - currently generate revenues.
In FY16, the portfolio earned toll revenues of Rs 675 crore, an increase of 10 per cent YoY but is expected to clock Rs 900 crore topline in FY17, where in the entire portfolio will complete one full year of operations. So far, it has invested Rs 7500 - Rs 8000 crore behind these build-operate-transfer (BOT) projects spanning 1,000 km across seven states. Of this, around Rs.5,000 crore is debt.
Both Brookfield and Reliance declined to comment.
"All the 11 projects are housed under separate SPVs. All of them will come under 1 mother SPV and Reliance plans to sell 100 per cent shareholding of that to Brookfield. There is no FDI restriction in roads and only NHAI approvals will be required," said a source in the know, on condition of anonymity as the talks are still in private domain. "Brookfield after the Gammon buyout last year has on ground expertise to manage and run such toll roads assets in the country," he added.
Investment bank Ambit is sell side the advisor in the deal.
Restructuring Reliance With an eye to turn Reliance Infrastructure debt-free on a standalone basis by 2017, the company's management has been actively pursuing a series of asset sales. The company was founded as an electricity company when the undivided Reliance Industries acquired the state-run Mumbai electricity distribution company and then expanded into infrastructure development. But of late, the Reliance group has been in the process of restructuring - selling off capital-intensive businesses like cement and roads and looking to rope in partners for its Mumbai electricity distribution arm in an attempt to reduce debt and focus more on new, capital-light, high RoE defence business. It recently agreed to sell its cement business to Birla Corp for Rs 4800 crore and has signed a non-binding term sheet to sell 49 per cent in its Mumbai power business to the Canadian pension fund Public Sector Pension Investment Board (PSP Investments).
Following the closure of both the cement and roads portfolio, Reliance Infrastructure's debt is expected to come down by Rs 13,000 crore. The company's standalone debt was about Rs 15,500 crore as on 31 March. Consolidated debt was Rs.25,000 crore in the same period, which the firm expects to cut by a third to Rs 8,000 crore by the end of the current fiscal itself.
"The net cash flow of Rs 24 billion from stake sale will be used to reduce standalone debt. We believe the focus on defence equipment business, along with steady cash flows from the power distribution business, can create value for shareholders in the long term," wrote IDFC Securities analysts Shirish Rane and Mohit Kumar earlier this February post the cement sale at 2.2 X equity invested.
"If Reliance can recover its invested equity and debt it will be happy. It is clearly defocusing on most sectors other than defence and EPC," said another sector analyst when asked about the likely deal valuations.
Big bull on India After pumping in $2 billion in India since 2009-10 when it set up its local office, Brookfield is planning to invest $2 billion more in India over the next 2-3 years to buyout upscale offices and commercial towers, stranded roads, power and utilities infrastructure as it aims to double its existing asset base in the country.
It started investing here in 2012-13, with $20 million in Kotak Mahindra Bank Ltd's infrastructure fund and subsequently tied up with Peninsular Land for mezzanine lending to residential projects. But its first mega local deal was in 2014, when it bought out Unitech Corporate Parks Plc. (UCP), a portfolio of six assets including special economic zones and information technology (IT) parks for around Rs 4,700 crore. It was one of the largest commercial real estate transactions. Today, with 400 people in the team, Brookfield rivals some of the biggest real estate and infrastructure companies in the country in heft.
Globally, the group also seeks to be countercyclical, buying during distressed periods. In India, in recent times its name as a potential suitor has repeatedly cropped up in almost all multi-billion M&A transactions - from DLF or Hiranandani's office portfolio to Jaypee's cement assets. With operating platforms well in place following big ticket acquisitions, Brookfield has been scouting for operationally intensive businesses and sectors or troubled assets with dislocated capital structures.
"Our core areas -- property, infrastructure, power and private equity, that is building materials and industrial businesses -- happen to be where a lot of the stress is. But the assets themselves are not stressed, but are world class. They just happen to belong to businesses that are stressed," Brookfield India Country Head, Anuj Ranjan had told ET recently in an interview.
Intereestingly, just last week, State Bank of India (SBI) and Brookfield proposed to launch a joint venture (JV) fund to which the Canadian partner has agreed to commit Rs 7,000 crore to purchase distressed assets. SBI, the country's largest lender, will contribute up to 5 per cent of the total investments made by the fund under an in-principle agreement with Brookfield announced last Wednesday. The fund will independently evaluate and invest in various stressed assets and will rely on the Canadian asset manager's operational expertise to manage recapitalized businesses.
With an AUM of $250 billion, Brookfield, firm, listed on the New York and Toronto exchanges, has surpassed Wall Street heavyweights Carlyle, KKR or even Apollo as the world's 2nd biggest manager of alternative assets. Even for Reliance roads, it trumped several global suitors like GIC of Singapore and CPP Investment Board (formerly the Canada Pension Plan?Investment Board).
Fresh from raising $14 billion to invest in infrastructure, believed to be the largest single commitment to the sector of its kind, the Toronto-based group is believed to have been approached to partner the government's National Investment and Infrastructure Fund (NIIF), coming on board as one of the key sponsors to the Rs 40,000-crore corpus.
After raising another $9 billion property fund, it has boosted its public profile after a series of high profile shopping spree. Last year it, bought London's Canary Wharf while in New York it is behind Brookfield Place, originally known as the World Financial Center, a complex of office buildings located across West Street from the World Trade Center site in the Battery Park City neighbourhood of Manhattan.